Tuesday, March 11, 2014

The price of IronOre has fallen significantly on world spot
and futures markets. This is due to overcapacity in China allied to a drop in steel
production there. So concerned are the Chinese authorities about this situation
that they have started to forcibly close down steel mills. They have also let
it be known that they no longer wish the Chinese banks to extend credit to
steel producers.

All of this points up the wisdom of the Australian monetary authorities
in attempting to transition their economy from one that had a large dependence
on mineral extraction and export to China, the largest component of which has
been Iron Ore, to one that is more reliant on domestic consumption and
services.

The problem is that these transitions take time, and the Aussie economy
is still bound to be affected by a slowdown in mining. Such a situation is not
good for the Aussie dollar. Yet interest rates in Oz, while low by their
historical standards, are still high by any global measure. This attracts the
attention of carry trade (where traders borrow in a low interest rate
environment, like Japan, and loan out currency in a higher interest rate
jurisdiction, like Australia), and this tends, still, to strengthen the local
currency, or to at least to prevent it from weakening faster. The reason for
not reducing rates further is the fear, well realised even at current levels,
of a housing bubble.

We will be watching for how the Austrian authorities handle this
particular conundrum, with great interest.

Our positions in Yen, Aussie and Kiwi

Yesterday we opened positions in USDJPY (long), AUDUSD (short) and
AUDNZD (short). All are still alive and so far moving in the required
direction. All are, as well, under the control of our Mandelbrot software. We
set this routine against gold also yesterday, on the short side, but the
algorithm kept us out of a position. That may change.

We are also watching Cable, or the British pound against the US dollar,
although there is severe indecision here as it sticks very close to the support
level established at the 200 period monthly Simple Moving Average (SMA), which
we have alluded to previously. It
simply does not know which way to jump from here.